(Foundational) Monetary Policy

John H. Cochrane – Over the past 15 years the Fed has engineered a fundamental advance in monetary policy by paying interest on reserves and supplying “ample” reserves…Banks holding lots of reserves don’t lend less. If the Fed buys Treasury bonds to create reserves, banks hold more in reserves and less in Treasurys. Money available for lending is the same…More deeply, we learned that the Fed can fully control the short-term interest rate by simply varying the rate it pays on reserves without having to ration money. Read More

By William M. Isaac – Instead, the FDIC should have turned to its 1982 innovation: the modified deposit payoff. This would ameliorate the damage a bank failure inflicts on the economy without creating the moral hazard accompanying a 100% guarantee. Uninsured money that would otherwise sit idle for years at the failed bank receivership would be returned promptly to the local marketplace to support economic growth. Read More